There are many ways to invest in the potential marijuana boom. Many are plays for recreational marijuana which will boom if legalization goes as expected. Many are medical plays which are incredibly likely to be successful but the upside is smaller. The last is companies that happen to have a lot to gain from the marijuana industry but aren��t necessarily reliant upon it for success.
This last type is what we find in Scotts Miracle Gro (SMG). This company is one of the biggest lawn care companies in the world and is consistently profitable. On the side however, it has been acquiring business after business in its Hawthorne segment that is focused on hydroponics. This business is positioned primely to be a huge growth factor if marijuana is legalized recreationally. While the company would not be producing and selling its own plants, it offers the necessary solutions prime to enhance the abilities of a marijuana business to produce.
This is positive for multiple reasons. The first is that the regulations relevant to marijuana even if it does get legalized in the majority of the country will be stringent and expensive. To ship and sell marijuana outside of individual states will likely remain difficult and taxation will be expensive. In addition, international production and exports will still be complicated tasks. However, none of that is true when it comes to gardening solutions that can be used for marijuana. As a company that doesn��t sell actual marijuana, it can take advantage of the growth without having to face all the legislation and scrutiny of the producers.
To see how Hawthorne is growing and is positioned we can look at their finances and some of their recent acquisitions.
Each of these companies either officially or unofficially has a different play in the legal marijuana business: Botanicare is a nutrients company that sells nutrient systems for hydroponics to grow marijuana. The company sells nutrients that range from home growers to commercial applications. Agrolux is a provider or growing lights used for indoor hydroponic growing. This is a similar acquisition to Gavita which is also a large lights player in the hydroponics space. All these acquisitions in the last two plus years have been done with the goal of taking a large portion of the overall hydroponics business. As this is the primary way to grow high quality marijuana, we can see that hydroponics command a higher price as it is the primary indoor growing technique. It is pretty clear why this company should considered a real marijuana play as it has put significant resources towards the future of the marijuana industry.
We can see how committed the company is to this play by the percent of assets devoted to the Hawthorne segment of the business. While the segment last quarter only made up just over 13% of the companies assets, it now comprises nearly 18.6%. This shows that the company sees this segment as a driver of growth and wants to increase its exposure to the business. 
The truth is this makes complete sense for the business. Marijuana is one of those industries that has the potential to be absolutely massive if controls are reduced. While the fear of legislation that will slow or stop the spreading of the legalization of marijuana have caused marijuana stocks to command lower valuations as the risks are huge, this is not true for SMG as the company has the majority of its current business stemming from other segments. The company derives more than 90% of its sales from its U.S. consumer gardening business. This means that even if speed of legalization begins to slow, the company is still a legitimate gardening business. This play is not boom or bust or high risk like the rest of the industry, it is a real business with the assets in place to take advantage of a huge growth opportunity.
In addition, as the chart below shows, the marijuana industry is already becoming at least partially legal in a large portion of the country. However, it also shows how much room there is to grow.
One of the largest wins for the marijuana industry could be coming soon as the New York Health Department just suggested that the pros of legalizing marijuana outweigh the cons. This study may be a catalyst not just for legalization in NY but also for other states that are on the fence. Many states have held out due to fear of the health of its citizens but if this report has the sway that it seems, many states may start to consider legalization as a way to increase tax revenues.
This chart below shows how much revenue states get from each tax source. To show how big of an impact excise taxes on substances can have, a look at the amount of taxes from alcohol is pretty indicative. This should help the prospects of marijuana companies such as MJ Holdings (OTCPK:MJNE) and General Cannabis Corp. (OTCQX:CANN)
Alcohol Sales U.S.:
While the marijuana industry is not predicted to be even close to as large as the massive alcohol industry, it has already started to make a positive dent in the taxes of its recreational legal states. As other states want in on the action and it gains support from health professionals, it is likely legalization will continue to sweep across the country. Even the red states are starting to get in the mix.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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